How cash benefits distort the monetary system, increase our deficits and discourage investment.
When we pay cash benefits we distort calculations of cost, wealth and money supply. If we provide basic social services universally, free at the point of need, we would reduce costs across the private and public sectors, improve the flexibility of businesses and enable more accurate money supply management.
The premise of this argument is that the activities that satisfy the basic human necessities of life are not wealth generating; and that paying cash benefits leads to the inclusion of their purchase price, instead of their output cost, in economic calculations, which distorts the results.
Services delivered between citizens in support of the basic welfare of society are not wealth generating transactions in a monetary sense. To understand this, we must evaluate the content of services such subsistence shelter, sustenance and healthcare. There are three distinct contents for each service: generic labor, value adding labor and capital. Generic labor is that portion of the service that requires no special skills to deliver, and can generally be categorized as ‘manual labor’. Value adding labor is the portion of the labor necessary to deliver the service that commands a premium in the market place, on account of special skills or experience. Finally, the capital portion refers to the content of the service which has to be manufactured or purchased from a external agency. In reality, nearly all labor has some value adding element; but it is important to recognize that in the lowest skilled activities command a very small premium over subsistence wages, and therefore the value added is often less than 20% of the total labor cost. The value added labor and capital portions of the service are truly wealth creating, but the generic labor portion is not. The generic labor used to deliver subsistence services does not generate a return; its value is consumed at the point of expenditure.
This is already recognized in current economic models by separating out the charity and nonprofit sectors. In these cases, it is recognized that the services delivered are not generating wealth; and therefore they are only counted on the basis of the contributions made to the sectors, not the output generated by them. This implicitly recognizes that housing the homeless, clothing the freezing and feeding the starving are not wealth generating transactions that should be included in measures used to measure economic wealth. They are services that undoubtedly contribute to the value of our societies, and they have very similar characteristics to infrastructure investments, in that they establish the basis and groundwork for the development of future wealth, but they are not themselves wealth generating transactions. This is represented in the discussion about the value to the economy of homemakers; the consensus of economists is that including the value of the output of homemakers in economic calculations would fundamentally corrupt calculations of GDP and economic wealth.
If we were to provide universal access to basic social services, free at the point of need, it would have a transforming impact on public finances and the enterprise economy. In an economy where the fundamental social services that make up the bare necessities of life are delivered free of monetary value to everyone, the immediate impact is that the “cost” of labor is dramatically reduced. When everyone in the society has shelter, sustenance and the other basics of life guaranteed to them, they are freed to work in whatever manner they can, for whatever wage that someone else is willing to pay. It is in the nature of humans that they will have desires beyond those satisfied by the subsistence services, and so will be keen to earn some discretionary income that they can use to satisfy their other needs. Because all of the resources in the labor market are guaranteed comprehensive social services, the labor market is freed to price labor using accurate demand and supply criteria, negating the need for a minimum wage.
The minimum wage becomes unnecessary because the basic survival of individuals is not dependant on the market for labor. The primary purpose of minimum wage regulation is to ensure that workers are not exploited in their desire for basic subsistence by ensuring that they are at least paid a living wage. In effect minimum wage regulations are an abstention of social responsibility, and they distort labor markets with clumsy attempts to compensate for that lack of responsibility. Society is infinitely better off simply providing the services that ensure all workers are guaranteed subsistence, and then freeing the market to define labor rates. Workers are freed to take the jobs they want, to work as hard or as little as they want, and employers are similarly liberated – all without damaging the fabric of society. If employers do not offer sufficient reward to attract the labor they need, or if they provide unacceptable working conditions, they will not be able to hire the labor they need.
Universal social services and liberated labor markets allow labor to be accurately priced according to the actually wealth-generating portion of their output, measured as the delta between the subsistence value and the market value. The net result is lower labor rates across the entire economy; proportionally more significant, the lower the skill level or less value added.
Reducing the cost of labor, in cash terms, has obvious effects in the enterprise business market by not only the reduction in cost basis, but also in the improvement of flexibility in the workforce. A workforce that is not dependent for its basic sustenance on specific employment, can react much more rapidly and flexibly to changes in the marketplace. Employers are able to react much more quickly to changes in their markets because they can easily change work patterns without being encumbered with mountains of regulation. This flexibility enables all participants in the economy to be less risk averse and more inventive.
The lower cost of labor also has a significant impact on public finances. Principally the impact is felt in the reduced tax burden of providing the social services themselves, but also in the reduced price assigned to infrastructure investments. Both of these reductions stem from the removal of the subsistence portion of labor cost from labor pricing. The subsistence portion of labor costs is removed from the economic calculations and absorbed by the social fabric, in the form of citizen-to-citizen support services delivered free of monetary value in exchange for the same. The labor is still provided, but the subsistence portion of its value is not monetized.
The monetary cost of providing social services is reduced; because the labor rates for the people who are delivering the services is lowered. This cyclical reinforcement reduces the overall tax burden, and increases the capital proportion of the cost that remains. Because the labor required to deliver the bulk of subsistence social services is low skilled work, the value added portion of the labor cost is a small fraction of today’s total labor charge. Only the value added portion of the labor needs to be paid for from tax receipts and that reduces the tax burden. The labor content of services such as education and healthcare includes a higher percentage of value added, and so the reduction in the costs for those social services is less. Nevertheless, removing the subsistence portion of labor from the overall cost of delivering basic social services will reduce both total cost and the percentage of cost assigned to labor. The result is that a higher percentage of taxes spent on providing social services will be spent on capital investments. Given a stable population, the increased capital allocation will result in a substantial long-term reduction in the cost of social service provision.
Taxes and wealth are expressed in monetary terms; and, in a progressive tax regime, more taxes are levied from the highest wealth generators. So transferring the subsistence portion of social services costs on to the social fabric of the society, reduces the tax burden most significantly for the wealth generating members of the society. In other words, providing free basic social services is in the best interests of the wealthiest members of the society.
If labor rates are substantially reduced, this will also impact the ability of the society to raise tax revenues from income taxes. Income taxes will only apply to the value adding portion of labor, because that is what is expressed in monetary terms. There are two modifying effects that mollify the apparently negative consequences for tax receipts. First, the majority of income taxes are raised from the highest earners, so removing the subsistence portion of income from tax calculations will have a relatively minor impact on overall receipts. In fact, so long as the reduction of total social service provisioning costs contributed by lower labor rates, is greater than the effective income tax rate on subsistence wages, the net result will be a reduction in the tax burden compared to current systems. Secondly, tax revenues could be raised by a comprehensive income tax that is levied on all income, without personal allowances. This will be more politically acceptable because all subsistence needs have already been taken care of by the social services provided.
The impact on the public financing of infrastructure investment is to bring the “cost” of those investments down and, at the same time, more closely match the interest burden on any such investments funded from budget deficits. Because budget deficits are necessarily funded with borrowing, it is important that those funds are spent on performing assets that can deliver a return, to support the interest burden on the debt. By removing the subsistence portion of the labor costs from the price tag of the infrastructure, the amount of borrowing can be reduced. The rate of return on the investment is improved, so repayment schedules can be shorter, and the return rate of the infrastructure investment can be more easily supported without unnecessary expansions of the money supply.
Finally, a beneficial side effect of using input cost pricing for basic social services is that their recognition within GDP calculations at their cost, makes GDP a more accurate measure by which to gage wealth, and therefore manage the money supply. The trouble with a benefits system is that it prices the value of the services at their acquisition cost, because the recipient uses cash to buy services. We pay unemployment benefits as cash, we pay pensions as cash; but what we are really trying to do is deliver services such as housing, sustenance, shelter and healthcare. Instead of actually delivering the services, we find it easier to send cash. This substitution of services with cash is the basis for miscalculating wealth and GDP, because the purchase price of social services is used instead of the provisioning cost.
Changing from cash benefits to universal services reduces labor costs, lowers taxes, makes infrastructure investment more affordable, increases business flexibility and improves money supply management. What more reasons do we need to start owning up to our responsibilities and living up to the social contract we implicitly rely on for a peaceful life?